War on cash gains fresh impetus

Last weeks showed there is no doubt what priorities financial elite has. One country recently made a move which resulted in terrible consequences. Indian government decided to revoke high-value notes as a legal tender.

Indian experiment

Imagine, 86% of all cash in circulation suddenly becomes worthless. This is exactly what happened after 500 and 1000 rupee notes lost their purchasing power. Narendra Modi, the Prime Minister of India, announced this on 8th November when the world was watching the US elections. The reason behind this decision given by the head of Indian government was to fight with tax evasion and black market economy.

India was a testing ground. Such a dramatic change in a country on its way to catch up to already developed world tossed Asian state into chaos. ATMs were cleaned off all cash in just 3 days since the decision, people still tried to get any money creating huge queues before banks’ entrances.

India is no exception among developing world when it comes to having some of its population working in the black market economy. People earning their living this way were not able to deposit any money in their banks because they could not prove the source of this income. In the rural part of the country, people turned to barter. In areas near the border foreign currencies became the medium of exchange. A lot of people seeing this chose to buy gold to preserve their wealth. In some places, an ounce reached an equivalent of 2000 USD!

Delegalising majority of notes in circulation had to cripple the economy. Companies felt falling demand instantaneously. Prices of food fell by 25-50%. The automotive industry was hurt badly. Below you can see how different types of vehicles fell percentage-wise.

Source: CEIC, Goldman Sachs Global Investment Research

There are also those believing in such changes. More often than not, they belong to the middle class and want India to finally reach the same level as other civilised countries. They believe that this attack on cash is justified by the fight with the black market economy. Unfortunately, they do not see how dangerous a government intervention on such a scale can be. Here, the idea is more important than objective assessment of said project. It reminds me of several countries in Europe believing that the EU accession will guarantee security and bigger GDP growth. For over 8 years, GDP growth of 3% is received with overwhelming applause in Europe. In terms of security, recent immigration flow made especially Western Europe very unsafe.

Sweden does not need cash

Swedish central bank, the Riksbank, eyes issuing their own electronic currency called ‘ekrona’ in 2 years.

The evolution should take around 24 months, after which Swedes would have to phase out paper money becoming the first country in the world using exclusively electronic currency.

It goes without saying that Swedish circumstances are different than Indian. Scandinavian society has already got used to cashless payments.

Why fight the cash?

To answer this question I will use a quote one of Morgan Stanley directors heard during Davos summit and conveniently placed it in his presentation.

Removing cash is the ‘endgame’. It is a key element in speeding up on the road to full economic serfdom of the masses. Everything is sprinkled with good intentions but what it eventually translates to is an improved ability to fleece people of their money at a scale unknown in history.

A significant number of countries have indebtedness problem today. Removing cash is the wet dream of politicians. Cashless society gives way to introduction of negative interest rates. Citizens would have to pay for their deposited money and the debt as a result could be reduced. On the other side of the economy, governments would be able to borrow at no cost. Can you imagine any obstacle stopping political class from borrowing even more money and spending it on even dumber ideas and projects? We can only wonder what promises parties would be eager to conjure to differentiate between themselves.

How it all affects us today? Definitely more sensible part of the society will invest in precious metals – as seen in India.

The way changes were introduced in India cannot look reasonable from the point of view of the elites because it sparked a huge outrage. We can only assume that it was a big experiment – what can happen if the majority of notes would be rendered illegal? This does not change the fact that common methods used against cash are more subtle (ending the circulation of one note, lowering the limit for cash transactions). To spot them, society has to be vigilant. This is the “boiling frog” which escapes the attention of many – introduction of the plan is easier to overlook if it is divided into phases.

If future is cashless then the universal basic income (UBI) will also be there. While giving the poorest enough to vegetate, its height will be particularly aimed at discouraging the crowd from taking to the streets.